You buy a term insurance policy for two reasons: to provide a financial safety net to your family, and the second is to help get access to funds for paying off loans. Thus, the affordability of the term plan makes this policy type the most widely used by individuals.
As you are aware, term insurance is a pure type insurance contract in which the policyholder should continue to pay the premium for the agreed term and should there be an unfortunate eventuality; the insurer would pay the nominee the amount of sum assured under the policy. Now, suppose you survive the term insurance tenure and no longer have heavy financial obligations. In that case, the fixed premium under the policy could seem a waste, and you probably want to put it in some other savings avenue.
However, there are two possible ways to surrender a term life insurance policy:
The insurance company will cancel the policy, and your nominees will no longer be eligible to receive any death benefit under the policy. You could receive some paid-up value on the policy according to the specific method of computation of term life policy cancellation proceeds under the policy but remember this amount is taxable * . Any loan against the policy would have to be squared up before the surrender process can happen.
As mentioned before, term life plans can have surrender value which is the amount that has been allocated from the premium paid. Different insurers have different methods of calculating the surrender value of their policies. In general, you should have paid the premiums for a stipulated number of years before a surrender request can be entertained.
In TATA AIA policies, the policyholder can surrender voluntarily and receive the surrender benefit computed according to the policy's terms and options for payouts. A special surrender value computed at a specified percentage of the premium paid is also paid.
Instead, you should deeply consider the following outcomes before deciding to go ahead.
The decision to surrender an ongoing policy should not be taken hastily.
Term insurance plan surrender is not an advisable option especially considering that a new policy at an older age would be more expensive, and you would need whole life coverage if you wish for a longer coverage period. Therefore, you should look for alternatives to the surrender option. The two ways you can avoid the unnecessary outcomes of surrendering the plan are given here.
When you surrender the term plan , there are many risks that your family is exposed to, and these should be mitigated. Unfortunately, an alternative such as a new policy would be very expensive for the extended life period, even for lesser coverage. Here are some reasons why you should not surrender a life insurance policy:
You have taken the right step in getting adequate term life coverage, especially if you are the primary earning member of your family. If you have reached the stage of life where you have higher income, better returns from investments and a good corpus for retirement, you would feel that the term life policy should be surrendered. However, it is not a feasible idea for the reasons discussed above. Therefore, allow the policy to run for its tenure and keep your family protected at all times.
L&C/Advt/2023/Jan/0182